COUNTRIES should pick up the tab for their own legacy bank debt, the deputy president of Germany's Bundesbank said in Dublin.

In a speech, Sabine Lautenschlager effectively said Europe's bailout pot should not be used for past banking problems.

And the senior central banker said the arguments for shifting losses completely to the European level were not compelling.

"As these risks (legacy risks) were created in the past, under the responsibility of individual member states, they should be borne in a national context, too," Ms Lautenschlager said.

BAILOUTS

The comments come just days after eurozone finance ministers agreed that Europe's bailout pot, the European Stability Mechanism (ESM), could be used to pay for past bailouts "retroactively".

Such payments will be decided on a case-by-case basis, so it is not clear whether Ireland will be allowed to benefit. Any country can stop a decision.

Finance Minister Michael Noonan said last week that the Government has yet to decide on whether to tap into the fund or not.

Ms Lautenschlager did not refer specifically to Ireland's legacy bank debt issue in her address to the Institute of International and European Affairs (IIEA), simply stating that her comments concerned the legacy risks of banks supervised under the Single Supervisory Mechanism (SSM).

The Bundesbank vice president also said that a full banking union could not be rolled out without a change to European law, which could mean a referendum in Ireland.

Ms Lautenschlager said the SSM, which will see powers ceded from national supervisors to the European Central Bank, needs to be put on a "sound legal footing", with no getting around changes to primary law.

Changes to the law would also have to be made to put in place a eurozone mechanism for winding up failed banks.

"I am indeed aware that many are recoiling at the thought of changing primary law, as it is a long and winding road," Ms Lautenschlager said.

"Ultimately, however, the project of creating a banking union is similar to the creation of the single monetary policy.

"And we did things properly then and started by establishing a sound legal foundation.

"If it was good enough for establishing a monetary union, it will be good enough for a banking union."

Ms Lautenschlager said it was expected that the SSM regulation would enter into force in the late summer, so that in the second half of next year the European Central Bank (ECB) would take over supervision powers. The influential central banker also said that shareholders should be the first to be hit with losses when a bank was being wound up.

"If that does not suffice we must not hesitate to bail in junior and senior debt holders as well – at least most of the time," she said.